New Government’s pledge to raise inheritance tax (IHT) threshold

17/06/2015

There was much excitement back in October 2007, when the then Labour Government introduced the concept of allowing the transfer of any unused IHT threshold (known as the ‘nil rate band’) from a late spouse or civil partner to the second spouse or civil partner when they die. The increase meant that the second partner’s estate could benefit from up to two nil rate bands (2 times £325,000 or £650,000), depending on the circumstances. Furthermore, the legislation was written on the basis that the relevant nil rate band to be applied, would be that which existed at the date of the second partner’s death. There was an assumption that the nil rate band would increase in line with inflation on an annual basis.
As we now know, the nil rate band has been frozen and no increases have occurred since 2007. Furthermore the previous Coalition Government, looked to extend the freeze until 2019, linking it to its plans for funding elderly care. Given the increase in values of properties particularly in London and the South East, the number of estates becoming subject to IHT increased dramatically. It was estimated that fixing the nil rate band to 2019 could bring a further 5,000 estates into the IHT net and raise an estimated £1 billion of extra tax revenue for the Government.
In their 2015 election manifesto, the Conservative Party pledged to raise the IHT threshold with the headline that homes worth up to £1 million would be sheltered from IHT. The details of this pledge are expected to be set out in the new Government’s emergency Summer Budget on 8th July 2015. However what can be said is that the manifesto promise does not mean that there will be a £1m exemption for every residential property. Our understanding of the proposal is that home-owners will be given an additional £175,000 nil-rate band that applies only to the value of the family home. When this “home allowance” is passed on following the death of the first spouse, the survivor will have a total nil rate band of £1 million, but £350,000 of that band will only give relief against the value of their own home. Those who die with an estate worth over £2.35 million will not benefit from the additional £175,000 nil rate band for homes.
For further information regarding the proposed IHT changes, please contact our in house solicitor, Liz Hooley.

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